IRS Releases New Employee Retention Tax Credit Guidance
Mar 28, 2025
Wait, we’re talking about the Employee Retention Tax Credit (ERC) yet again? Yes, you read it right, after hearing very little on the topic for the past 18 months, ERC is back in the news. On March 20, 2025, the IRS released new Employee Retention Tax Credit Guidance in an updated FAQ.
Specifically, the IRS introduced a new section entitled “Income Tax & ERC,” that addresses, one, situations where taxpayers didn’t reduce their claimed wage expense but received the ERC, and two, situations where taxpayers did reduce wage expenses but had a disallowed ERC claim. The tax authority also expanded guidance on reporting ERC fraud.
Here is what you need to know:
Income Tax & ERC
- The IRS stands by its original position that taxpayers should have reduced their deductible wage expense by the amount of allowed ERC in the tax year the qualified wages were paid or incurred. However, the IRS is now providing alternative solutions for claiming unreduced wages. Under the revised guidelines, taxpayers now have the option to report the overstated wage expense as gross income in the tax year when the Employee Retention Credit was received, rather than amending their previous returns. This marks a shift from the earlier policy.
- The updated FAQ also addresses scenarios where an ERC claim was denied after a taxpayer had already reduced their wage expenses for the year in which the qualified wages were paid. In these cases, taxpayers can now adjust their current return to reflect the increased wage expense corresponding to the disallowed ERC, instead of filing an amended tax return, an AAR, or a protective claim for refund for the earlier tax year. It’s important to note that taxpayers may still opt to amend previous returns to recapture the previously reduced wages.
ERC Scams
- The IRS has issued further guidance on the procedures for reporting ERC-related fraud, strongly urging taxpayers to report any suspicious activities, including illegal, tax-related activities involving ERC claims, individuals who promote improper and abusive tax schemes, and tax return preparers who deliberately prepare improper returns. The step-by-step process for reporting ERC fraud can be found in the “ERC Scam” section of the FAQ.
To read the full FAQ along with the updated guidance, please refer to the IRS website here. To better understand how this new guidance may impact your business, we encourage you to connect with our Employee Retention Tax Credit (ERC) lead, Mike Hanf.
Mike Hanf, Tax Partner – mike.hanf@wvco.com
Categories: Tax Compliance
Freeze on Employee Retention Credit (ERC) Processing
Sep 18, 2023
What happened:
As of last Thursday, the IRS temporarily halted the processing of new Employee Retention Credit (ERC) claims, owing to a surge in ERC-related scams and fraudulent submissions. IRS Commissioner Danny Werfel expressed concern over genuine small businesses falling prey to deceptive schemes. “As we move further from the pandemic, it becomes evident how the noble intentions behind this program have been exploited,” stated Werfel.
Initially, the ERC was designed to offer relief to businesses and tax-exempt entities. Yet, the allure of a refundable tax credit has led to a rise in opportunistic consulting firms. Many of these firms, while promising substantial refunds, neglect to inform businesses about crucial wage deduction adjustments an other limitations contained within the ERC rules.
Key details:
- The processing freeze will be in effect until at least Dec. 31, 2023, meaning no new ERC claims will be entertained.
- The IRS will still review the 600,000 previously filed ERC submissions.
- While payments on prior claims will persist, claimants might need to furnish extra documentation to confirm their claim’s authenticity.
- The standard processing timeframe for ERC claims may exceed 180 days, especially if further scrutiny or an audit is required. The IRS notes that several claims are already earmarked for audits.
- Due to the heightened examination of filings, expect processing delays and intensified ERC audit inquiries and criminal probes. The agency’s main focus is on potential fraudulent promoters and enterprises.
- The IRS emphasizes that illegitimate ERC claimants will be liable to repay the credit, potentially with added penalties. Claiming incorrectly might leave businesses in a financially precarious position.
Next Steps:
Given the intricate nature of the credit calculation, it’s imperative to partner with a trustworthy firm. Businesses should remain wary of overtly enticing tax-saving pitches. William Vaughan Company, a trusted industry leader, is poised to offer guidance and insights to anyone with concerns about their ERC filing.
Finally, the IRS has provided resources, including updated FAQs, to ensure businesses aren’t swindled by scam promoters or pressured into fraudulent applications. A forthcoming settlement program will also be launched by the agency this fall to oversee the repayment of certain unjust ERC claims. For comprehensive details, refer to the IRS’s official ERC website.
Categories: Tax Compliance
Proposed Regulations Address Foreign Tax Credit Rules
Dec 27, 2022
The IRS has recently issued proposed regulations relating to the foreign tax credit covering:
- Guidance on the reattribution asset rule for purposes of allocating and apportioning foreign taxes
- The cost recovery requirement
- The attribution rule for withholding tax on royalty payments
Reattribution Asset Rule
The 2022 foreign tax credit final regulations provide rules for allocating and apportioning foreign income tax arising from a disregarded payment. Foreign gross income included by reason of the receipt of a disregarded payment has no corresponding U.S. item because Federal income tax law does not give effect to the payment as a receipt of gross income. The new proposed rules therefore characterize the disregarded payment under Federal income tax law for purposes of assigning this foreign gross income to the statutory and residual groupings.
These rules treat the portion of a disregarded payment, if any, that causes U.S. gross income of the payor taxable unit to be reattributed as a “reattribution payment” under either the rules for gross income attributable to a foreign branch in the case of a taxpayer that is an individual or domestic corporation; or the rules for gross income attributable to a tested unit in the case of a taxpayer that is a foreign corporation. The excess of a disregarded payment over the portion that is a reattribution payment is treated either as a contribution from one taxable unit to another taxable unit owned by the first taxable unit, or as a remittance of a taxable unit’s current and accumulated earnings.
Cost Recovery Requirement
Under the cost recovery requirement, the base of a foreign tax permits the recovery of significant costs and expenses attributable, under reasonable principles, to the gross receipts included in the tax base. The proposed regulations provide additional guidance with respect to whether the test is met in certain cases where foreign tax law contains a disallowance or other limitation on the recovery of a particular cost or expense that may not reflect a specific principle underlying a particular disallowance in the Code. The proposed regulations also provide that the relevant foreign tax law need only permit recovery of substantially all significant cost or expense, based on the terms of the foreign law. A safe harbor is provided for applying the requirement.
Attribution Requirement for Royalty Payments
The attribution requirement allows a credit for foreign tax only if the country imposing the tax has a sufficient nexus to the taxpayer’s activities or investment in capital. Under the source-based attribution requirement, a foreign tax imposed on the nonresident’s income on the basis of source meets the attribution requirement only if the foreign tax sourcing rules are reasonably similar to the U.S. sourcing rules. With respect to royalties, foreign tax law must source royalties based on the place of use of, or the right to use, the intangible property, consistent with how the Code sources royalty income.
The proposed regulations provide an exception (the single-country exception) to the source-based attribution requirement if a taxpayer can substantiate that the payment on which the royalty withholding tax is imposed was made pursuant to an agreement that limits the right to use intangible property to the jurisdiction imposing the tested foreign tax. The exception applies only when the taxpayer has a written license agreement that meets certain requirements.
The proposed regulations also modify the separate levy rule to provide that a withholding tax that is imposed on a royalty payment made to a nonresident pursuant to a single-country license is treated as a separate levy from a withholding tax that is imposed on other royalty payments made to such nonresident and from any other withholding taxes imposed on other nonresidents.
William Vaughan Company will continue to monitor proposed changes on foreign reporting. For immediate questions or concerns, please contact our team of experienced tax professionals.
Categories: Tax Compliance
IRS Tax Update: Filing Deadlines Extended to February 15, 2023 for Hurricane Ian Victims
Oct 04, 2022
On September 29th, the IRS announced Hurricane Ian victims in the state of Florida will now have until February 15th, 2023, to file various federal returns.
The tax relief measure applies to businesses and individuals operating and residing in areas designated to receive disaster relief from FEMA. Those eligible must also have had a filing deadline of September 23rd, 2022, or later. In other words, any business or individual in the state of Florida that filed to extend their 2021 federal tax returns out to October 17th, 2022, will now have until February 15th, 2023, to file any returns or taxes.
For businesses, the extension relief will also apply to quarterly payroll and excise tax returns normally due on October 31, 2022, and January 31, 2023. For individuals, the tax relief applies to any quarterly estimated income tax payments due on January 17, 2023. Additionally, penalties on payroll and excise tax deposits due on or after September 23, 2022, and before October 10, 2022, will be abated as long as the deposits are made by October 10, 2022.
The IRS will automatically apply this relief measure to taxpayers with a record of address in the disaster area, meaning there is no need to contact the agency directly. However, if an affected taxpayer receives a late filing or payment notice (that had an original or extended filing, payment, or deposit due date falling within the postponement period,) the taxpayer should call the number listed on the notice as soon as possible to abate the penalty.
For more information on the tax relief measure or to see if you qualify, contact your trusted team of tax professionals at William Vaughan Company as we continue to monitor IRS updates and the situation in Florida.
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Categories: Other Resources, Tax Compliance, Tax Planning
Everything You Need to Consider About the Advance Child Tax Credit Payments
Jul 16, 2021
As we are heading into the second half of 2021, individuals are now starting to receive their advance Child Tax Credits payments as a result of President Biden’s American Rescue Plan. The law, signed in March, increases the overall child tax credit, expands it to include children turning 17 this year, and adds another annual $600 benefit per child under six years old. While the advance payment on the credit may be a welcomed windfall, there are some important aspects of this tax credit individuals should be aware of when receiving these payments.
Receiving Payments
Individuals with dependent children started receiving monthly payments on July 15th which are estimated to total half of the amount of their estimated 2021 Child Tax Credit. The other half of the Child Tax Credit will be received when the 2021 Tax Return is filed in 2022. Individuals are required to reconcile the payments received on their 2021 Tax Return so they should keep track of the payments received throughout the year and include that information with their tax documents.
Overpayment
If an individual receives more than what is due to them, they will be required to pay back the difference. This differs from the stimulus payments, where individuals were allowed to keep the additional funds. This primarily applies to those with a dramatic increase in income during 2021. An example of this scenario:
- If your income level qualified you to receive additional Child Tax Credits in 2020, and your new income level in 2021 does not, you will have to pay back the money received in regards to the additional Child Tax Credit you no longer qualify for.
Increase in Tax Due
The advance child tax credit received will be in lieu of claiming the tax credit on the 2021 income tax return. Since half of this credit will be received by the time the 2021 income tax return will be due, the amount of the child tax credit will be halved on the 2021 Return. This means that there will be fewer credits to offset against the tax due, which may cause a higher-than-normal tax due, or decrease the potential refund some are used to receiving. This holds especially true for those with a dramatic increase in income for 2021.
Opting Out of Advanced Payments
If taxpayers do not wish to receive the advanced payments of the Child Tax Credit, they can elect out of them. Typical reasons for opting out of the advanced payment are as follows:
- An individual normally has a balance due to the IRS after filing their taxes
- An individual doesn’t claim a dependent every year due to shared custody arrangements
- An individual’s dependent(s) is(are) aging out of the range of the credit
- An individual prefers having a large tax refund
Anyone wishing to elect out of the advanced payments, you may do so by clicking this link and following the instructions provided.
Changing Bank Account Information
If taxpayers would like to learn how to change/update their banking or direct deposit information, click here.
New IRS Portal
The IRS is currently developing a portal in which a user can enter updated information impacting the amount of payment an individual will receive. A user can do all of the following in this portal:
- Update marital status
- Enter in children born in 2021
- Re-enrollment into the Child Tax Credit if you were previously unenrolled
- Adjust your income for the calculation of the Child Tax Credit
As previously stated, this portal is still in development but the IRS is looking to release this portal in the coming months. Reach out to your WVC professional for questions on your specific situation.
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Categories: Tax Planning